The legal risk of doing business in Brazil is high for many reasons, among them the view of certain Judiciary’s lower courts to “protect” companies under Judicial Recovery (JR) (equivalent to US Chapter 11) against creditors – specially those secured by extrajudicial collateral.
In the last 4 years, we saw many decisions of JR’s judges not recognizing the extrajudicial treatment of certain crucial collateral for the existence of liquidity in the Brazilian financial markets, such as Fiduciary Lien over Farmland, Fiduciary Assignment of Receivables and CDA/WA, all in the name of “social interest” of companies under JR.
The good news is that in many cases the State Superior Courts have reformed such extreme lower court decisions, restating the legal security of collaterals not subject to the JR’s universal proceedings.
It is worth noting two recent decisions, one from the Sao Paulo State Superior Court regarding CDA/WA, and the other from the Goias State Superior Court related to Fiduciary Lien over Farmland. In both cases the State Superior Courts fully reformed the respective lower court decisions to guarantee the right of creditor to access, seize and take full ownership over the secured asset, regardless whether the companies were or not under JR, based on the fact that the legal instruments per se secure the those rights in favor of the creditor.
In light of the examples above and many other cases of similar nature, creditors must pay attention to their collateral in distress scenarios, particularly the extrajudicial ones, in order to not allow limitation of any of their credit rights.
